Avoiding late filings

[Griet van Vliet]

The first step in treating the client of the day's tax records and the resulting slips was to reconcile the partnership's income statement to the taxable income. Two general partners operating a hairdressing salon. The relevant form for that client is:

Net income (and EBIT) under ASPE 110,000 (includes non-eligible dividends of 20,000)

Add back:

Charitable donations 4,000
Political contributions 2,000
Depreciation expense 14,000
Club dues 5,000
Loss of sale of investments Nil
50% of meal and entertainment expenses 5,000
Partners' salaries 30,000 (50% to each partner)
Net taxable capital gains 10,000

Deduct:

CCA (10,000)
Gain of sale of investments (20,000)
Capital dividends received (10,000)

Taxable partnership income 140,000

 

[Griet van Vliet]

Now for the two T5013 tax slips for the partnership: the base amount is 70,000 each. But since each partner earned 10,000 in non-eligible dividends as per the partnership's T5 slip, the gross-up of 16% is therefore 1,600 each so the partnership income has 71,600 reported in full, of which 15,000 is on their T4 slip, so 56,600 will be in the other boxes of their T5013s.

"<Having the T4 and T5013 is not the end of the story: we want our ACBs>"

"Are you planning on selling your share of the partnership?"

"<Maybe, maybe not. But our opening balance is 20,000, and contributions are 5,000, with withdrawals under the form of salary being 15,000>"

"Salaries are not the end of the story when it comes to withdrawals. If you guys withdrew another 10,000 total, then you would add it to the withdrawals, and further adjustments are required to the partnership income"

Opening ACB 20,000
Contributions 5,000
Withdrawals (salary) (15,000)
Withdrawals (other) (5,000)
Partnership income 71,600
Gross-up (1,600)
1/2 of Capital gains 5,000
Capital dividends 5,000
Political contributions and charitable donations (3,000)

Ending ACB 82,000

 

[Griet van Vliet]

"<I have an offer for 100,000 for my share of the partnership. What would the tax consequences be to accept it?>"

"The proceeds of disposition would still be 100,000, and the resulting capital gain is 18,000, of which 9,000 is taxable"

"<Thank you for your help in this matter>"

Poodoo: it seems that clients come to me for specific stuff on specific days. Section 85 one day, partnerships the day I return from Elrood. I have a client wanting to buy the next one's partnership interest for 350,000, she thought, while pulling out the income statement as well as the notes.

Mike and Dave, Lawyers​

Income Statement​

For the year ended...​

​

Gross revenue 650,000
Expenses:
Office supplies 30,000
Drafting materials 20,000
Rent 40,000
Utilities 10,000
Office salaries 60,000
Charitable donations 6,000
Depreciation 34,000
Meals and entertainment 16,000
Partner salaries 200,000

Operating expenses 416,000

Gain on sale of investments 40,000
Non-eligible dividends 18,000
Capital dividends 20,000

Net income 312,000

The opening ACB has been determined to be 15,000.

 

[Griet van Vliet]

Net income 312,000

Add back:

Charitable donations 6,000
Depreciation 34,000
Meals and entertainment 8,000
Partner salaries 200,000
Capital gains 20,000

Deduct:

CCA (48,000)
Gain on sale of investments (40,000)
Capital dividends (20,000)

Taxable partnership income 472,000

Mike's share 236,000

Plus NED gross-up 1,440

Mike's partnership income 237,440

 

[Griet van Vliet]

ACB opening balance Nil
Contributions 15,000
Withdrawals (salary) (100,000)
Withdrawals (other) (20,000)
Partnership income 237,440
Gross-up (1,440)
1/2 of capital gains 10,000
Capital dividends 10,000
Donations (3,000)

ACB ending balance 148,000

Therefore Mike made a capital gain of 202,000, of which 101,000 is a taxable capital gain.

 

[Griet van Vliet]

Now the buyer is liable for installment payments (which typically enter the balance owing calculations at year-end): the due dates are 15 days from the end of the quarter. The installment payment file is the following:

852 ABY | 30,000 tax owing | 10,000 withheld | 20,000 net balance owing
853 ABY | 40,000 tax owing | 8,000 withheld | 32,000 net balance owing
854 ABY | 24,000 estimated

Method 1: 1/4 of the year's estimate, 6,000 per quarter
Method 2: 1/4 of the previous year's net balance owing, 8,000 per quarter
Method 3: The "reminder method": 1/4 of the net tax owing for the second past year for the first two quarters, 5,000 per quarter, and the last year's tax owing minus the payments already made, over two quarters, so 11,000 for the last two quarters

 

[Griet van Vliet]

There are clients that need to be mindful of the prescribed rate, such as shareholder benefits on loans. If the TRA is late in issuing refunds (typically it's when there are tax complications that need to be resolved before the refund can be issued) it's the PR+2%, PR+4% if the taxpayer is late in paying. And there are clients that file late, here are the penalties:

First offense: 5% of the unpaid tax, plus 1% for each complete month one is late (maximum 12 months)
Second and third offenses (within three years): 10% of the unpaid tax, plus 2% for each complete month one is late (maximum 20 months)

Interest is on top of this.

 

[Griet van Vliet]

The following day, the first client of the day is an elderly SME owner, whose shares have a PUC of 25,000, ACB of 375,000 and FMV of 1.25 million, having bought it from someone else a few years ago, wants to implement a share reorganization. He gives up the whole class of common shares, and, in return, he obtains 7,500 retractable 8%, non-cumulative preferred shares with a FMV of 100 each, with a LPUC of 25,000. and the children will get 50% each of the new common shares. There is therefore a gift of 500,000.

ACB NSC Nil (because there is no NSC)

ACB P/S:

ACB old shares 375,000
Less: NSC Nil
Less: Gift 500,000

ACB P/S Nil

POD is the lesser of FMV C/S and NSC + gift = 500,000

No NSC means that TPUC = LPUC and no deemed dividends either (there is only a deemed dividend if the NSC exceeds the PUC of the old shares). But the capital gain to the old owner is 125,000 of which 62,500 is taxed.

"I'd like to know what happens on my tax return - and my sister's if she does that rather than I - if I sell immediately after the reorganization for their FMV, what are the tax consequences?"

"This is where the gift of 500k went, split both ways: it's the FMV of what you and your sister have combined. Now, if you were to sell to an arm's length party for 250k... the capital gain would be at most that, and the taxable portion half that"

 

[Griet van Vliet]

A M&A file went to her right after the earlier case: a system of four shell companies. More gangsters! They want to get rid of one of those shell companies because it's causing too many losses! Is that some moneylaundering technique? she thought. Dividend and capital gains stripping, and now four shell companies! The decision is either amalgamate Y and P, or wind up P into T. From the segmented financial statements: T earned 10,000 net in the first quarter, and estimated 90,000 for the other three quarters. Y also has the same FYE, net income of 34,000 in the first quarter, and estimated 150,000 for the rest of the year. P has accumulated 256,000 in ABILs and didn't declare dividends. ACB of shares is 100,000, and a net tax cost of assets of 67,000, with a PUC of 30,000. These gangsters wanted a side-by-side comparison of amalgamation vs. a Section 88(1) wind-up.

In both cases: tax costs and account balances flow through
CCA: Amalgamation allows the subsidiary to claim CCA, but wind-up doesn't
FYE: Amalgamation creates a deemed FYE to both, while the wind-up doesn't alter the parent's FYE
Losses: Amalgamation can use the subsidiary's ABILs in the first year subsequent to amalgamation, while it's only the first FY after wind-up (both subject to AOC rules)

"A-ha! Time to taste some Neural Storm, gangsters! Your attempt at using amalgamation or wind-up for defrauding taxes stops here!"

 

[Griet van Vliet]

After these gangsters that wanted to amalgamate or wind-up a shell company have had their bounties claimed, it was time for Griet to return to the office. A trust case: a trust fund created for the benefit of his two children, and the settlor donated 500 HoldoWare shares to the trust, which was worth 240,000 at the time, and purchased them for 90,000 (after the release of the Bloodless Coup, at a Bloodless Coup concert). Therefore he incurred a capital gain of 150,000, of which 75,000 is taxable. That trust must base its FYE on the calendar year unless it's a GRE, which cannot happen since a GRE requires the trust to be testamentary, and it's an inter-vivos trust. Which means they have 3 months to file the tax return(s). And they seem to have to file the tax return, two possibilities: paying the full income to them, or retaining it.

Interest income 6,000
Eligible dividend 8,000 (even though there has been no tax withholding of the dividend, for Talz tax purposes, it's considered eligible)
Gross up 3,040
Taxable capital gain 60,000 (the trust sold the shares for 100,000)

Total 77,040, split evenly

Income attribution for paying the income to the children: for the oldest child, aged 24, ED and CG stays with her, but interest is attributed back to the father if the reason is to save taxes. For the younger child, aged 14, he can only keep the capital gain but the ED and interest income is attributed back to the father (assuming the capital gain is NOT liable for TOSI payments).

 

[Griet van Vliet]

That client also had three more transactions done involving family that carry tax consequences: he gifted 1,000 shares of another public company that he initially bought for 10 credits each, and valued at 12 when the gift was made to his son. Meanwhile, the son received 600 in dividends, and later sold them for 30 each. So the capital gain is 1,000 since it's not a spousal gift, and, because attribution rules, the full dividend amount is attributed back for 828 inclusive of gross-up. Now, for the second transaction: another 2,000 shares gifted to her wife and the ACB of 30/share therefore flows through to her wife. And then the wife gets a capital gain of 16,000, of which the taxable amount of 8,000 is attributed back to him. Finally, the will left his mother's house to him, the estate doesn't have to pay the capital gains on the home at death since it made the principal residence election. Yet, the client's capital gain on the sale of the home of 60,000 is made based on the FMV at her mother's death of 600,000, which meant 30,000 is taxed. And then he can repay the mortgage in full.

 

[Griet van Vliet]

His older nephew sold to his 18-year-old sister a 15,000-square-feet plot of land, costing him 15,000, for 25,000 while its FMV was 40,000. The land is rented out and yielded 800 in rental income this year (which is not attributed back). The nephew gets a capital gain based on FMV, but the niece's ACB is the cost of 25,000. But the picture is different on the second, neighboring plot of land, sold to the client's youngest nephew, with the same tax characteristics. In both cases the older nephew has to declare a 12,500 capital gain, but the younger nephew would need to attribute back the rental income of 800, and also declare for himself a taxable capital gain of 10,000 that is not attributed back.

 

[Griet van Vliet]

While the smoke from Rhen Var had yet to clear, Griet, however, didn't wait on the results of Rhen Var to get back to work upon return to ORC space. Here there was a client that wanted to use Section 85 to transfer the shares of the business to a newly-formed shell corporation, which would be and had a 750,000 balance remaining in the LGCD. According to the initial plan, the business shares' PUC and ACB was 100,000, the client had an offer for 1.9 million from an arm's-length party, but before the client could retire to Iokath and bring their family to Iokath as well, the client wanted to elect 850,000 under Section 85 and issue debt in this amount, while the remaining 1.05 million was the share capital of this new shell corporation, to be issued to the client and ultimately transferred to the client's children once a new shell corporation is established on Iokath.

"I wanted to later establish a shell corporation on Iokath that will then buy the shell corporation"

"Hold on a second: this isn't an estate freeze, this is tax evasion: Iokath has no corporate tax, nor personal tax, only excise if your business generating active business income is dealing in M&P. There are issues with electing this much, and also, since the shell corporation is, well, brand new, it has no GRIP, no N/ERDTOH balance"

"What do you mean, there are issues in electing 850,000?"

 

[Griet van Vliet]

Dividend stripping rules would apply here: here it would mean the following:

Increase in legal stated capital 750,000 = 850,000-100,000

Less: Excess of elected amount 850,000
Over NSC 750,000 | 100,000

PUC Reduction (amount re-characterized as an ineligible dividend) 750,000
Gross up of ineligible dividend 120,000

Taxable ineligible dividend 870,000

"You want to strip dividends, but before you ask me to restructure this transaction..."

"It's early in the tax year, better make the move before the first payroll is out: I know about the deemed year-end it would create"

"Even though I cannot, in good conscience, condone tax evasion, I hope you're ready to have the benefits tied up in share capital. There may be a simpler solution that doesn't involve setting up shell corporations, but... did you bring the list of tax values and FMVs of the business' assets?"

 

[Griet van Vliet]

"OK, let's try to issue just 100,000 in debt instead of 850,000, in which case there would be no deemed dividend and a capital gain of 750,000"

"Oops: if I wanted to do that I'll be deep in debt because I'd then need to take out a loan for 1.8 million to establish the business on Iokath"

Assuming there was no other incomes, the taxable income would be nil, but that's precisely the sort of stuff that someone will get caught under the AMT for. For AMT: there would be 450,000 in net income under AMT, of which 410,000 is taxable, and the tribe is charging 29% total if one is caught under the AMT, so the tax bill of this operation is 118,900. So much for tax evasion. The business has no liabilities whatsoever. Park Safari Kingdom was a traveling circus, which had equipment, animals and a trademark as an asset.

"The solution I'm proposing you would be to undergo a 88(2) windup, and re-establish the company on Iokath afterward"

 

[Griet van Vliet]

"I have some reservations"

"I feel that you're asking whether a circus is a viable entertainment form on Iokath"

The circus' assets (that aren't of a deferred-tax variety) are as follows:

Cash and short-term investments | FMV: 100,000 | ACB: 100,000
Circus equipment (CCA class 8) | FMV: 480,000 | Capital cost: 300,000 | UCC: 216,000
Circus starship (CCA class 9) | FMV: 700,000 | Capital cost: 350,000 | UCC: 260,000
Circus animals (non-depreciable for tax purposes) | FMV: 520,000 | Capital cost: 150,000
Inventories | FMV: 100,000 | ACB: 100,000

So there is a total capital gain of 900,000, one-half of it is taxable, and subject to the NRDTOH, and the other half is a non-taxable CDA, and CCA recapture of 174,000. Determining how much debt to take out to buy out the circus' assets at FMV and then move the circus to Iokath will depend on the circus' tax bill on wind-up, the circus owner's tax bill and the moving expenses.

 

[Griet van Vliet]

"I wonder how much are the existing CDA, RDTOH and GRIP balances of Park Safari Kingdom"

"Why?"

"We know 450,000 will be returned to you tax-free through the CDA, 100,000 because it's the capital you paid in, but are there any existing balances in the CDA? That amount will be returned to you tax-free, too. To the extent you have a GRIP balance, the remaining amount will be treated as an eligible dividend, and also the existing RDTOH balance will become an ERDTOH if your GRIP balance is high enough, which will reduce your corporate tax bill to the extent eligible dividends are paid"

The client's tribe not only charged a 48% surtax on personal income tax, it also charged a 48% surtax on corporate income tax. Therefore the total N/ERDTOH balances, and income tax payable is 1.48 times the base amount. Any existing CDA amount will be the result of capital gains earned from past short-term investments, the balance is 60,000 and the existing RDTOH balance is 25,000; as for the GRIP, 70,000. However, the taxable capital gains earned from the 88(2) windup will mean that Park Safari Kingdom has lost its SBD eligibility since it exceeds 50,000. Sure, the entire RDTOH balance of 25,000 as at the last year-end is now ERDTOH, the question is: how much is the NRDTOH, and how much of the liquidating dividend will be taxed as non-eligible dividends? NRDTOH must be applied before the ERDTOH. The Part I tax paid on the wind-up is as follows:

Active business income: 174,000*15% = 26,100
Investment income: 450,000*38 2/3% = 174,000
Gross Part I corporate tax payable: 200,100
Less: Non-eligible dividend tax refund: 450,000*30 2/3% = 138,000
Less: Eligible dividend tax refund: 25,000

Net Part I corporate tax payable: 37,100
Tribal surtax: 37,100*48% = 17,808
Total corporate tax payable: 54,908

Liquidating dividend: 1,900,000 - 610,000 - 54,908 = 1,235,092
Less: Eligible dividends: 195,280 = 70,000 + 174,000*72%
Ineligible dividends: 1,039,812

 

[Griet van Vliet]

Because there is a significant amount in non-eligible dividends, there is no need to calculate the circus owner's AMT here. Since PUC = ACB there is no capital gain, nor loss, but here is the final tax return of the circus owner:

Ineligible dividends: 1,039,812*1.16 = 1,206,181.92 (inclusive of 166,369.92 in gross-up)
Eligible dividends: 195,280*1.38 = 269,486.40 (inclusive of 74,206.40 in gross-up)

Total taxable income: 1,475,668.32
Less: Bracket lower limit: 205,842.00
Taxable income at the highest bracket: 1,269,826.32

Gross income tax payable: 1,269,826.32*33% + 47,670.00 = 466,712.69

Less: Basic personal amount: 1,771.00
Less: Ineligible dividend tax credit: 120,996.31 = 166,369.92 * 8/11
Less: Eligible dividend tax credit: 40,476.22 = 74,206.40 * 6/11

Net federal income tax payable: 303,469.16

Total personal tax payable: 449,134.36

"I'm afraid this operation still costs you over half a million creds in tax, the bulk of it from the liquidating dividend disbursed in non-cash form, but in a tax haven, debt is more expensive than it is when tax rates are what they currently are here"